I'm all in favor of KotOR sequels, provided they live up to the quality of the original.
Obsidian really has their work cut out for them if they hope to provide an experience as good as the original KotOR, and I'm kind of worried. I am especially worried that Obsidian will try to "mainstream" the game and that they will "dumb it down" to appeal to a broader audience. I also hope they don't listen much to most player suggestions.
It's a shame that the KotOR III team got canned, but then again, in-house development of KotOR III might not be such a great idea. If they do make a KotOR III, I think the development should either go back to BioWare, or it should go to Obsidian (depending, of course, on how well Obsidian does with KotOR II)